All publicly traded companies compensate their board members and invest heavily to assure shareholders and the public the board is properly composed, independent of conflicts of interest and knowledgeable about the industry and the organization itself.
Most of the transactions In healthcare are handled by investor-owned companies: health insurers, drug and device manufacturers and distributors, information technology companies, and investor-owned long-term care and hospital companies represent more than half the $2.8 trillion cash flow in the U.S. healthcare system; the rest is managed through hospitals, clinics and medical groups operated not for profit under faith based, public or private ownership. Notably, the not-for-profit Blue Cross plans compensate their boards as do the many of the faith based not for profit health systems but that’s not the case in the majority of local hospitals and academic medical centers.
According to the American Hospital Association Health Care Governance Survey, 13% of all US hospitals compensate their boards. Take away hospital boards run by the investor owned systems, the number of hospitals that compensate their board is scant, and even those that do pay only a few hundred dollars/year for meeting attendance.
Granted, most not for profit hospital board members do not expect to be paid nor seek compensation: they reason it’s an honor to serve their community and rightly so. Hospital CEOs routinely expose their boards to education via retreats alongside their medical staff and management team leadership. And accrediting agencies like the Joint Commission requires boards be conversant about quality and safety as well as the financial solvency of the enterprise.
Given the complexity of the health care system today, these are not enough.
Most hospital and AMC trustees have a general sense of what makes the hospital run. They have a vague sense of how Medicare and Medicaid work, and a keen sense of the interplay between the hospital and its physicians. Most think the Affordable Care Act is disruptive but very much a work in progress, and most think the spotlight on the hospital’s safety and quality is good for their community though cumbersome to collect. They understand the unique mission of an AMC to teach and do research, but not how it’s funded nor the value-differential ascribed its customers who pay a premium for its mission. That’s it.
Few trustees understand the healthcare industry’s other sectors—how insurers, drug and device manufacturers, HIT companies and others operate, secure capital, generate their margins and and serve their customers. Few understand the clinical innovations on the horizon that will reshape how care is delivered, at what cost and by whom. A handful understand the vast, complex array of regulatory agencies that oversee our acute enterprises nor the complicated and sometimes conflicting state and federal regulatory requisites. And some understand the uniqueness of challenges and opportunities in academic medicine, long-term care, safety net public programs, retail and alternative health among others.
Is it time to re-think board composition, preparedness and compensation in our not for profit domains of healthcare? I think yes, especially in not for profit hospitals.
Their pressing issues are unparalleled in complexity at a time when the stakes are high. Not for profit hospital boards, like every company in healthcare investor-owned or not, must be factually equipped and diligently responsive to 5 business imperatives for their organization:
Efficiency: cost containment is the central issue that forces the health system to rethink its priorities, assess its options and set a course that’s prudent. Annual health cost increases will likely hit 6% for the foreseeable future per the CBO. Cuts to Medicare and Medicaid, intense pressure from private insurers, and added costs for regulatory compliance mean many hospitals will not survive. Bad debt is likely to increase as more of the insured are unable to pay their deductibles and more of the uninsured seek care. And physicians, fearing income decline and loss in professional autonomy, are looking to hospitals to provide security. The hospital board must answer a tough question: what changes are necessary for survival? The justification for a hospital cannot be that it employs a few hundred in a community if the standard of care—measurable safety, outcomes, and efficiency is suboptimal. Nor can it be the false security of its reputation: employers, consumers and health insurers will not pay more for services because the hospital is local if costs are higher and outcomes are equivalent or better in other options. “Being the only game in town” is no assurance of long-term sustainability. An objective assessment of all future-state scenarios must be a deliberate, ongoing item on the board’s agenda. Cost containment is the driver. Efficiency, through outsourcing, partnerships, or operational overhaul is necessary to survival.
Risk: not for profit hospitals face enormous performance risk. The Office of the Inspector General is keen to disclose and punish hospitals and physicians who needlessly prescribe, test and do surgical cases otherwise not supported by evidence-based best practices. A board not clear on the fundamentals of evidence-based practices, and the management of treatment options not in sync with best practices is not a board prepared for its future. Gaps in care resulting from non-adherence to evidence-based practice are a bigger risk to a hospital than fraudulent coding: it must be understood by trustees and management held accountable for its remediation. Like efficiency, the risk for fraudulent behavior—whether coding or providing care that’s unnecessary—poses an enormous challenge to hospitals and is table stakes for survival.
Value: every dollar received by the hospital, its physicians, ancillary services and clinics—will transition to a value-based formula. Health plans and employers will justify narrow networks and use reference pricing in their contracts. Drug and device manufacturers will participate in the hospital’s bundled payments and ACOs to secure volume at the expense of their rivals. The mechanisms a hospital has at its disposal to create and sustain a measurable value proposition in its community, to its supply chain partners, to payers and to its physician partners is complex: a board must understand them completely. The concept of value to most hospital boards is abstract. It becomes real when a competitor exploits a value-gap stealing revenue and margin considered safe.
Growth: A hospital board can ill-afford to be content that “all healthcare is local” or “our mission is to serve the community” when others outside the market have stronger value propositions attractive to important segments in the market. Bigger organizations have more leverage with payers and more purchasing clout with their suppliers. Bigger organizations use information technology for clinical and financial administration more strategically and have better outcomes. Boards must understand the imperative: go big or get out. It’s simply a matter of scale.
Innovation: Hospital boards must understand the tidal wave of innovation across the spectrum of healthcare and be prepared to respond. The clinical landscape is shifting as clinical investigators chart the path to personalized therapies that target troubling cancers, smart implantables that capture real-time bio data, and exploration of the brain to unlock the secrets of autism, Parkinson’s, Alzheimer’s, depression and other menacing problems. Investors are making big bets on service delivery models and cloud-based solutions. And information technologies that facilitate remote connectivity, virtual treatment and consumer-directed self-care have gained traction at a record clip. These innovations are disruptive to a hospital unless a board is vigilant about their acceptance and forward thinking in understanding their intended and unintended consequences for the hospital.
Being on a not for profit hospital or healthcare board is an honor. But it’s also a responsibility laden with risk.
Whether compensated or not, it’s time to rethink governance in our healthcare organizations, and to respond deliberately to these business imperatives that frame our future.
Paul
